The Reserve Bank’s campaign to slow the economy and demand by raising interest rates seems to be working.
And it would seem the slowdown might be happening faster than business or groups like the National Australia Bank were predicting.
Retail sales have slowed, building approvals are easing, and now business confidence is continuing to fall according to the latest survey from the National Australia Bank.
In fact business confidence and conditions have fallen to their lowest levels for five to six years.
The drop in confidence and in expectations about the outlook for business conditions seems to be across most sectors, with the exception of mining which continues to boom.
And it would appear inflationary expectations are easing with many businesses reporting lower confidence in being able to boost prices in the future.
These are the sorts of comments and indicative reactions the RBA looks for in sentiment surveys. The RBA and Governor Glenn Stevens have referred to the slowdown as tentative: it would seem to be a bit stronger than that.
Later today we will see if the recent fall in consumer confidence has continued when the latest Westpac/Melbourne Institute Survey details are released.
The NAB said in its March survey that the fall in business conditions to be at their lowest level since late 2002, confirms a significant easing in growth momentum; while business confidence fell to the lowest level since September 11.
"Business confidence remains weak and forward orders have deteriorated," the bank said.
The bank said the survey results imply that demand growth has slowed faster than expected, to around an annual rate of 3-3.25%.
The Bank says a further slowing is expected – especially in rate sensitive sectors.
This will see the economy grow at around 2.75% for both 2008 and 2009 – supported by the budget tax cuts, the farm sector rebound and stronger commodity prices. Unemployment will rise.
The NAB says this means the RBA will not lift interest rates again this year and the "downside risks to growth are increasing despite high inflation". Therefore the timing of 2009 RBA rate cuts have moved forward to early 2009 but could start late this year.
The NAB said the latest reading of business conditions fell by 4 points to +7 index points: that was the lowest reading since December 2002 and represents a fall of 10 points over the past 3 months, one of the largest falls in the Survey’s history.
"All components of the business conditions index fell – with profits down 2 to +6 points, trading down 4 to +13 points and employment down 5 to +4 points. In trend terms business conditions also fell 4 points.
"Business confidence fell 2 points to return to -4 index points – the lowest level since September 2000.
"The key message from the March survey is that we are now seeing quite a significant broad-based slowing in domestic demand and business conditions," said Alan Oster, NAB’s group chief economist.
"The size of the slowing has caught both business and us by surprise."
"The RBA is in wait and see mode in 2008, but downside risks to growth are building," Mr Oster said.
The survey’s measure of sales dropped 4 points to 13 index points in March, its lowest reading since October 2005. The measure of profits eased 2 points to 6 points, while the employment index dropped 5 points to 4 points, the lowest since November 2006.
Forward orders also fell another 3 points to 0 index points in March, pointing to further weakness to come.
There were double-digit falls in business conditions reported for retailing, transport and finance and business and property services. In contrast, mining activity remained near record levels thanks to high prices and strong demand from China and the rest of Asia.
The NAB said the survey showed wage pressures seemed to have steadied over the past few months, though retail prices continued to pick up.
The NAB’s core retail inflation indicator pointed to another large rise in the RBA’s core measure of inflation for the first quarter.
That’s already been acknowledged by The reserve Bank as part of its signal to the markets not to panic about the CPI outcome because it won’t be moving rates.
